Hold the phone: Strong growth should support continued expansion of coverage and possibly further entrants

It was in the early 1970s that Sultan Qaboos bin Said Al Said began modernising the telecommunications industry by establishing regulatory bodies and encouraging investment in infrastructure and services. Oman’s telecommunications has come far since then – today, the sultanate boasts high mobile penetration, expanding 4G long-term evolution (LTE) coverage across key metropolitan areas, and a growing fixed-line market.

While the sultanate’s challenging terrain and low population density pose several problems to telecoms operators looking to increase their profit margins, much work has been done to expand telecoms coverage to all of Oman’s rural areas, as per the state’s Vision 2020 economic diversification plan, which highlights information and communications technology (ICT) developments as one facet through which the country can achieve growth targets, economic development and enhanced quality of life for its citizens and residents.

Liberalisation

The industry has shown strong growth in recent years – mobile subscriptions have more than doubled since 2007, average revenue per user (ARPU) is showing small growth and, despite an increasingly competitive market, revenues are rising for operators across the board. The government’s decision to sell some of its stake in the former state-owned operator, Omantel, marks a promising shift to privatisation and market liberalisation. Quality of service and mobile broadband coverage is also improving, on the back of the government decision to open up new spectrums to the private sector.

The industry faces challenges, most notably an increasing number of operators in a relatively limited market. While the sultanate’s largest operators have reported increases in revenue, profits are dropping. Infrastructure upgrades are proving costly, particularly in rolling out nationwide 4G LTE and fibre-optic coverage, and over a third of the sultanate’s rural villages are still only able to access basic services. As Oman’s infrastructure expands, however, companies’ long-term infrastructure investments, boosted by increased private sector participation and new financing deals, should ensure healthy growth in the coming years.

The Market

Oman’s telecoms sector is continuing its 40-year-plus transformation from a state monopoly to a multi-player market with significant private sector involvement. The government’s ambitious telecommunications and infrastructure goals have allowed it to maintain a strong pace of development, while it increasingly opens up new market segments to private players in an effort to keep the sector dynamic and competitive. During the past decade, the telecoms industry has been restructured under new laws altering the structure and regulatory environment.

In 2002 the Telecommunications Act (Royal Decree No. 20/2002) established the Telecommunications Regulatory Authority (TRA) to liberalise and promote telecoms services in the sultanate. The TRA oversees development by licensing operators, regulating and maintaining telecoms services, promoting the interest of service providers and ensuring consumers receive international service standards at reasonable prices. The TRA has range of licence classes. A class-I licence allows licensees to establish and operate a telecommunications network or international telecommunications infrastructure, as well as offer public telecommunications services or international access services that require using national resources. Six companies hold class-I licences: Oman Telecommunications Company (Omantel); Omani Qatari Telecommunications Company (Nawras); TEO, formerly known as Samatel; Madakhil (Maritime); Awasar; and FRiENDi Mobile. TEO and FRiENDi’s class-I licences allow the companies to run as international gateway operators, meaning they can aggregate inbound and outbound wholesale telecoms traffic.

Main Players

The mobile and fixed-line markets are largely controlled by two major providers, Omantel and Nawras, with a number of mobile virtual network operators (MVNOs) active within the reseller market. Omantel, the sultanate’s first and largest telecoms operator, was established in 1980 by Law No. 43, which created the public monopoly General Telecommunications Organisation (GTO). In 1999 the government transformed GTO into a state-owned joint stock company, Omantel, which became Omantel Group in 2004. In the same year, the company received the TRA’s first class-I fixed and mobile licences.

In July 2005 Omantel listed 30% of its shares on the Muscat Securities Market, and until recently, the government held the remaining 70% of Omantel’s shares. In September 2013 the government announced it would sell a 19% stake in the company. Omantel subscribers reached 3.95m at the end of June 2013, up 6.6% from 3.71m a year earlier. The firm’s domestic subscriber base rose 9.3% year-on-year (y-o-y) to 3.03m, with growth mainly driven by mobile business. According to the TRA, Omantel’s market share increased from 48.4% in 2012 to 49.3% in the first quarter of 2013.

Nawras, part of the Qatar-based telecoms group Ooredoo, is the sultanate’s second telecoms operator. Nawras was incorporated in December 2004 and was next to receive a class-I mobile licence in February 2005. It was awarded a class-I fixed licence in 2009, and launched its international gateway in April 2010, with corporate fixed and broadband services following in May 2010, and residential fixed and broadband services a month later. The company made its initial public offering (IPO) in November 2010, listing 40% of its shares on the Muscat Securities Market, with Ooredoo holding a majority 55% stake. The remainder is held among the pension funds of various government organisations. As of July 2013 Nawras had a consolidated customer base of 2.3m, up from 2m in the first half of 2012, and the TRA reported that its market share stood at 41.3% as of March 2013, up from 40.7% in 2012.

MVNOs

TEO, which was known as Samatel before it rebranded itself in late 2013, became the third operator to acquire a class-I licence in the first quarter of 2011. The Muscat-based company launched in August 2010 as an MVNO with a class-II reseller’s licence, operating on Nawras infrastructure. In 2010 and 2011 the company ran into financial trouble, with Omani investment firms Al Zaman Investments and Communication World buying a majority stake in the company in 2012. TEO is restructuring, and plans to focus on value-added services by introducing international calling cards and smart-phone applications. TEO also plans to diversify into mobile broadband and corporate services including fixed broadband, managed and cloud services aimed at attracting 100,000 customers in 2014.

FRiENDi is the latest operator and second MVNO in the sultanate to obtain a class-I licence, when parent company Connect Arabia’s application was approved in July 2013. Like TEO, the company will now be able to act as an international gateway operator. As a condition of the new licence, Connect Arabia, a consortium partly owned by Virgin Mobile Middle East and Africa, FRiENDi’s international partner, will sell 40% of its shares through an IPO on the Muscat Securities Market within five years, according to a July 2013 Reuters article.

MVNOs have played an increasingly important role in Oman’s telecommunications industry since 2008, when the TRA announced the issuance of five class-II MVNO licences to FRiENDi, Injaz International, Kalaam Telecommunications, Renna Mobile and Mazoon Mobile. In April 2009 the Dubai-based FRiENDi Group, which entered a partnership with the UK’s Virgin Mobile in June 2012, launched FRiENDi in Oman, leasing infrastructure from Omantel. One month later, Renna, owned by Muscat-based Majan Telecommunications, joined FRiENDi on Omantel’s network. The market has since shifted, with three main players now dominating the MVNO market – FRiENDi, which boasts an 8% market share, TEO and Renna Mobile. In 2008 MVNOs captured 5.9% of the market. This peaked at 12.3% in 2012 before sliding to 9.5% in the second quarter of 2013.

Despite operating on smaller margins compared to class-I operators, MVNOs have been able to bolster their customer bases by focusing on niche services, including international calling, off-peak rates and targeted packages. However, as the sector becomes increasingly crowded and new players look to enter the market, questions of profitability and commercial viability in what is a relatively small market remain.

“You don’t have to get 30% of the market to make a profit, but quite a few MVNOs have entered the market and failed. With the right regulations in place, I would say that there is room for maybe one more mobile provider in Oman, but it is approaching saturation,” Martin Glud, CEO of FRiENDi Oman, told OBG.

Fixed-Line Growth

Unlike many countries where the fixed-line market is approaching saturation or in decline due to the advent of mobile technologies, Oman’s fixed-line market has grown in recent years. The country’s two main fixed-line operators, Omantel and Nawras, have seen fixed-line subscribership increase since 2011. Nawras reported a 54% rise in its fixed-service customer base between the first half of 2012 and the same period in 2013, reaching 56,598 subscribers. Omantel, which maintained an 87.7% fixed-line market share as of June 2013, reported 260,000 subscribers in the first half of 2013, compared to 258,000 in 2012. Oman ended 2012 with a total of 304,545 fixed lines, an increase of 6% from 287,323 in 2011. The fixed-line segment showed further growth in 2013, with subscribership rising an additional 8.2% between January and March to reach 331,596 lines.

“The growth in fixed lines can be attributed in large part to combination packages on offer, which feature fixed broadband internet in conjunction with landline telephone services,” Srinivasan Narasimhan, policy advisor at the TRA, told OBG.

However, fixed-line penetration stands at just 9.15%, due to the fact that fixed services had a relatively small customer base in Oman from early on. Fixed-line ARPUs have been declining as well, falling from OR17 ($44) per month in 2007 to OR11.27 ($29.20) in 2012. These figures slid further in 2013, with fixed-line ARPU decreasing to OR9.30 ($24.10) as of March 2013. This revenue is still somewhat higher than mobile ARPUs, but as the two markets approach parity, new combination packages will be important to sustained fixed-line growth.

Mobile Expansion

Oman’s mobile telecommunications industry has shown remarkable growth in the past six years, with subscribers more than doubling from 2.5m in 2007 to 5.28m as of March 2013. The mobile penetration rate stood at 145.8% as of March 2013, a substantial decline from 190.29% in 2012. In its March 2013 market indicator report, the TRA explained that this drop can be attributed to calculations based on more recent population statistics. The agency had previously been using a benchmark population figure of 2.77m, whereas Oman’s population has since been calculated at 3.83m.

ARPUs, however, have shown a gradual decline as the market becomes increasingly competitive. Mobile ARPUs slid from OR8.82 ($22.84) in 2011 to a low of OR7.87 ($20.38) in the third quarter of 2012, before recovering to OR8.10 ($21) as of March 2013. Prepaid users make up 90.9% of total mobile subscribers, down slightly from 91.2% at the end of 2012.

Profitability

Omantel reported revenues of OR239.3m ($619.8m) in the first half of 2013, an increase of 2.1% from OR234.5m ($607.4m) in the first half of 2012, growth the company attributed to strong domestic retail and wholesale business revenues. However, net profit dropped to OR60.5m ($156.7m) between January and June 2013, a 2.4% decline from OR61.99m ($161.06m) in the same period in 2012. The drop in profits has been caused by aggressive expansion of 3G and 4G LTE services, as well as fixed LTE networks, with operating expenses increasing 4.9% y-o-y to OR175.2m ($453.8m) in the first half of 2013.

For Omantel, 2014 could be a benchmark year after the government announced in September 2013 that it will sell a 19% stake of the company through public subscription, which will transfer greater ownership of the provider to the local population, on top of helping the firm remain competitive and cover operating costs. The sale will see the government sell 27% of its shares, equivalent to 19% of the company’s share capital, which will effectively reduce the government’s stake to 51%. When announcing the sale, the government said it will appoint a consultant to prepare the necessary documentation in conjunction with Omantel and the TRA, which will determine the terms and conditions for the subscription and the share price.

Nawras also saw growth in the first half of 2013, posting revenues of OR98.4m ($254.9m) for the first half 2013, a 3.3% y-o-y rise. In a statement, Nawras said its expansion is being driven by increases in both fixed and mobile data revenues, despite a decline in SMS and national voice revenues. The company’s net profit was OR15.2m ($39.4m), a substantial drop from OR19.5m ($50.5m) in the first half of 2012, owing to lower earnings before interest, taxation, depreciation and amortisation, and the high cost of network modernisation.

Nawras is making a number of long-term investments in wireless broadband technology, investments made possible by a $182m finance deal signed in January 2013 to meet capital expenditure and working capital requirements. The company signed the deal with a consortium of finance companies including DBS Bank Dubai, HSBC Oman, Mizuho Corporate Bank and Qatar National Bank, and will use the funds as it moves further towards rolling out 4G LTE networks across the sultanate (see analysis).

Regulatory Developments

The TRA has moved to make important improvements to the regulatory environment in recent years, including enhancing rural coverage, defining market dominance, improving fair competition and tariff transparency, and, most significantly, spectrum re-allocation. The TRA’s 2013 work plan highlights initiatives including development of new executive regulations for the industry, establishment of a call centre to handle consumer concerns, creating new frameworks for market competition and mergers and acquisitions, and designing an auction for the 2.6-GHz and 800-MHz radio bandwidths. These developments should ensure clarity and coherence for telecoms operators in the coming years.

Coverage

As a relatively large country with a low population density, rural connectivity is of particular importance in Oman, although private telecoms firms have historically focused on high-density urban areas for infrastructure development and service provision. “For us, in this terrain, to cover a village of five houses inside a wadi (valley) is a monumental investment. Further work needs to be done in conjunction with the TRA to monetise such investments,” Per Sjöstrand, chief strategy officer at Nawras, told OBG.

As of June 2013, there were 1795 villages across the sultanate lacking network coverage, or 34.2% of villages. The TRA launched a survey in June 2012 to identify areas with few or no services, announcing in the same month that it planned to bring 150 villages basic telecoms services in partnership with Nawras and Omantel by the end of 2013 by building 120 mobile sites in under-served rural areas. In February 2013 the programme was also expanded to include another 250 villages through construction of 200 new mobile base stations. “We are working with the TRA in a national initiative to expand coverage to more villages within the sultanate, following the success of the initial plan,” Hamdan bin Moosa Al Harasi, general manager of corporate affairs at Omantel, told OBG. “Ultimately, Omantel will provide coverage to between 250 and 350 villages.”

Defining Dominance

The TRA published its “Market Definition and Dominance” report in August 2013, which will play a critical role in outlining rights and responsibilities of licensees. In its report, the TRA concluded that Omantel is the singly dominant telecoms operator in a number of markets, including narrowband fixed access, local and national voice calls, national leased lines, and international leased lines. The report also found Omantel and Nawras are jointly dominant in the fixed broadband, mobile, and wholesale broadband markets, among others. The TRA recommended measures to ensure fair competition, including that Omantel and Nawras be subject to obligations of nondiscrimination and and transparency, price control regulations and accounting separation obligations.

Framework For Competition

Other regulatory changes could be on the way, after the TRA moved forward on a new initiative to review the sultanate’s current licensing framework, in order to remove barriers of entry and enhance the level of competition in the telecommunications sector. The TRA put out a call for public input on how the new framework should be built, and in May 2013 published its response to the feedback it had received, along with draft regulations for the new licensing framework.

However, there has been concern over whether adding new operators to a highly competitive market will have a positive impact on the industry. “We want to be more flexible in our rates and in the design of our own packages. There are four class-l licences for the international gateway, which is a lot. We need to consider these developments on commercial terms. It is an increasingly competitive market, which at the end of the day, only benefits the customer,” said Glud.

Most significantly, the TRA moved in 2012 to reallocate a number of spectrums, or bandwidths, which use radio frequencies to transmit mobile data and voice. The move came after telecoms operators approached the authority in 2011 to explore spectrum liberalisation, which boosts infrastructure quality and helps operators cut costs. The Ministry of Transport and Communication announced a OR50m ($129.5m) appropriation to free up lower spectrum frequencies for commercial use in March 2012. Since then, significant improvements have been made in 3G and 4G LTE services (see analysis). “The biggest change that affected us positively in 2013 was the availability of new spectrums. Previously 3.5G services were provided on a single carrier. The re-farming enabled us to expand outside of the Muscat governorate. Within a few months we will reach major milestones in 4G delivery,” said Al Harasi.

Regionally, improvements to spectrum allocation are set to benefit consumers across GCC member states, including those in Oman. In March 2013, Iran, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE came to an agreement over mobile services spill-over, in which a lack of coordination for a number of frequency bands has caused residents living in border areas to inadvertently switch to roaming providers, increasing their mobile tariffs. Under the agreement, technical and administrative measures were adopted to resolve the interference issue, marking an important step forward in regional cooperation in the sector.

Outlook

As subscribership and penetration rates continue to rise on the back of expanded coverage and growing mobile and fixed-line markets, Oman’s telecommunications sector is poised to see healthy expansion in the medium term. “Oman’s demand for mobile data is growing which suggests that there is an enormous room for mobile broadband packages,” Abdullah Al Balushi, president of Ericsson Oman, told OBG.

New opportunities for expansion are also emerging. “The future opportunities in the sector can be found in cloud computing technology and the bundling of landline, mobile and internet packages,” Talal Said Mahroon Al Mamari, the chief financial officer of Omantel, said.

Meanwhile, the government is working towards striking the right balance between infrastructure developments and private sector profitability, with long-term investment in the sector set to benefit operators and consumers. Low population density and difficulties in expanding services and infrastructure are affecting profit margins, but delivery of these services will go a long way towards improving and enhancing the sultanate’s overall economic development. Moving into 2014, continuous expansion of rural connectivity, coupled with increased availability of mobile broadband services, should see the sultanate make good progress towards its Vision 2020 goals.

As the sultanate’s two dominant telecoms operators continue to invest heavily in technological innovation, the private sector will have an increasingly important role to play in the ongoing development of the sector.